Do you need protection?

Insurance companies have switched to promoting protection policies - critical illness, permanent health and term life cover - as their profit margins in traditional pensions and endowments have come under pressure. But what do these policies offer, and do you need them?

Firstly, state benefits provide a minimum safety net in the event of illness that prevents you working. Some are means-tested and for mortgages in particular, you have to wait nine months until the state will help with interest payments.

Secondly, benefits on offer from your employer may make buying a protection policy unnecessary. If you are a member of a company pension scheme, you almost certainly also have death-in-service benefit, which is usually equal to two to four times your annual salary.

Many companies also offer "group PHI" schemes, which will pay out a portion of your gross salary, if after a specified period - often a year - you are unable to return to work owing to illness.

If you are not covered by a company scheme, then it may be worth filling the gap with a protection policy.

Permanent health insurance (also known as income replacement)

PHI pays a replacement income until you are able to return to work, until you reach the age of 65 and state and company pension plans kick in. It covers a wide range of conditions such as back problems, mental illness, stress and depression and pays out after a waiting period, typically one to three months.

The cost of a policy varies tremendously depending on the level of benefits: you can choose to protect up to 70% of your income, whether you want it inflation-proofed, and whether you will return to work in any occupation or just your own. The cost will also depend on your job, age and sex. Women and people in manual jobs tend to make more claims, so their premiums are higher.

Critical illness

Critical illness policies pay a lump sum on diagnosis of named conditions. All policies cover problems such as cancer, heart attack and stroke, while most also cover major organ transplant, permanent total disability, Alzheimer's, loss of hearing, speech or sight, and multiple sclerosis. Check the small print to see what is covered.

There are no strings attached to the payment (you can do with it what you like) and if eventually you are able to return to work you do not have to repay the lump sum. You can buy critical illness as a standalone policy or combined with life insurance. These combination policies may cost little extra - and can even be cheaper.

The cost depends on age, sex and the amount of cover required. Women have to pay more and anyone over 45 will find that premiums are 50% or more above the price charged to a 30-year-old.

Life insurance

The simplest and cheapest life insurance is called term insurance. It pays out a lump sum if you die during a pre-determined period. If the cover is designed to pay off your mortgage, you should consider decreasing term cover, where the level of cover falls as you repay you mortgage. Buy purely on price, but remember that smokers are charged more.

Accident, sickness and unemployment cover

Also known as mortgage payment protection insurance, it usually pays out for 12 or 24 months, and typically costs £5-£6 per £100 of monthly mortgage repayment. Market Harborough building society charges £1.75 per £100.